Gold stocks in the UK: Key factors to consider before investing

Summary

  • Gold is one of the most-preferred safe haven assets that has witnessed a strong demand during the coronavirus pandemic era
  • UK gold prices have surged more than 20 per cent year-to-date (YTD)
  • Investing in gold stocks is one of the available options when it comes to exposing your portfolio with the yellow metal 

With the presence of numerous asset classes and the various business industries, the stock market offers an abundant number of opportunities for investment in the listed shares. All the retail, as well as high-net worth investors remain on a lookout for the growth stocks and the shares that have a promising future.

Following the ongoing uncertainty and increased volatility in the stock markets due to the coronavirus pandemic-induced jittery, it has been quite a hard time for the investors to assess the potential of promising stocks in the near future.

Why do people invest in gold?

A shift in investment preferences has been seen in the present calendar year with the escalating worries of the conventional businesses.

Safe haven assets become the soughtafter investment options amid the challenging periods when the doubts over regular investment options turn unusually high.

Gold is one of the most-preferred safe haven assets that has witnessed a strong demand during the coronavirus pandemic era with gold prices in the UK, as well as across the world witnessing a sharp uptick in 2020.

Gold prices in the UK in 2020

UK gold prices have surged by more than 250 per cent on a year-to-date (YTD) basis, defying the performance of many of the blue-chip shares of the FTSE.

As per the historical data available with the London Metal Exchange (LME), the prices of LME gold spot have surged by 22.45 per cent to £1,868 (29 October) per fine troy ounce from the level of 1,525.50 per fine troy ounce as on 2 January 2020.

Gold Prices LME Spot

Thomson Reuters

 

According to the data maintained by BullionByPost, the Birmingham-based bullion dealer, gold prices in the UK have registered a growth of 25.68 per cent to £1,447.05 per troy ounce (XAU) from a level of £1,151.36 per ounce. Earlier in August this year, gold prices in the UK touched an all-time high of £1,574.37 per troy ounce.

 

Gold Prices (XAU/GBP)

Source: Thomson Reuters

 

 

Investment in gold stocks

People who are looking to explore money-making opportunities in gold can benefit considerably by investing in the shares of gold miners, precious metal dealers, and retailers of gold jewellery.

Investing in gold stocks is one of the options when it comes to exposing your portfolio with the yellow metal. This is because a large section of people explore various other investment instruments related to gold other than the physical form of gold.

The shares of gold miners, retailers, traders, producers and other enterprises dealing with the precious metal industry, provide a definite exposure to the fluctuation in the gold prices. However, an immediate reflection in share prices of such companies is not evident all the time with a change in gold prices in the bullion market.

 

Benefits of investing in gold stocks

Investing in gold stocks provides a route to hedge your portfolio against the inflation and market uncertainties. In most of the instances, the unit price of a gold stock is relatively lower as compared to the per troy ounce or per gram price of gold.

Also, there can be situations when the share price of a gold miner has advanced more sharply as compared to the price appreciation in the precious metal itself.

Gold, being a safe haven asset, largely remains unaffected during the turbulent market situations, however, an investor needs to keep in mind that a country-wide market crash or negative global cues across the world can have a similar effect on the gold prices as it disturbs the stock markets.

 

Things to consider while investing in gold stocks

  • An individual should look for the details that are not easily visible and can affect the share price movement in the upcoming period. Gold stocks do not derive their wholesome value from the price changes of gold as there are many underlying factors behind the market price of a gold stock.
  • The factors include (but not limited to) company’s ongoing trade, currency fluctuation, debt-to-equity ratio, the demand of by-products of gold, cash flows, the scheduled capital expenditure, government policies with regard to mining sites, regulatory approvals for mining etc.
  • There can be a number of factors that have gone wrong in favour of the gold miner but the shares are not reflecting such things due to the invariable rise in market prices with the appreciation in gold prices in the bullion market.
  • Some gold mining stocks remain away from limelight unless they start operating domestically. There can be some gold stocks with robust operations in foreign sites and are largely involved in exporting and international trade.
  • In a highly volatile market condition, there can be a substantial side-effect of market turbulence on the gold stocks too as a disruptive business cycle also disturbs the businesses of gold miners, retail dealers and traders.
  • A person cannot understand the minuscule details of gold business without deploying a definite time in researching the enterprise, present market conditions for the nature of business, and the prevalent government policies.
  • From the outside, the business of gold mining companies, retail dealers, and exporters may seem an easy money-making model but there can be various complexities within the business that can be only recognised by patient scrutiny.

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